5 August 2002 External T.I. 2001-0098375 - RETIRING ALLOWANCE-YEARS OF SERVICE

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

Are various employers, including DIAND, which provided education at a school on a reserve, related for purposes of determining amount of retiring allowance eligible for rollover?

Position: Question of fact.

Reasons:

Must first determine if the employers are related pursuant to section 251 of the Act. If not, then 60(j.1)(iv) and (v) must be considered.

								July 5, 2002

XXXXXXXXXX  Tax Services Office			HEADQUARTERS
XXXXXXXXXX 	 						P. Kohnen, CMA
Client Services						(613) 957-2093

								2001-009837

Retiring Allowance - Years of Service

This is in reply to your memorandum of August 20, 2001, in which you requested our views regarding the number of years that should be used in the calculation of the amount of a retiring allowance that is eligible for transfer under the Income Tax Act (the "Act"). We have responded to you directly, rather than the submitter (XXXXXXXXXX), as the issues that were raised in your submission can be best resolved by your determination of facts in consultation with the taxpayer and their representatives. We apologize for the delay in our response.

We have reviewed the documents submitted, including the facts and arguments provided by the submitter. We have not attempted to verify the accuracy of the facts provided.

Based on information provided, it appears that XXXXXXXXXX (the "taxpayer"), was employed at the XXXXXXXXXX from XXXXXXXXXX, with several breaks in service. It appears, however, that she was employed by as many as three different employers during this period.

She was employed by Indian and Northern Affairs Canada ("INAC") from XXXXXXXXXX (for which she did not receive a severance payment) and from XXXXXXXXXX (for which she also did not receive a severance payment). Her third and final period of employment with INAC began XXXXXXXXXX and ended XXXXXXXXXX, at the conclusion of which INAC paid her a severance payment of $XXXXXXXXXX which was transferred to her registered retirement savings plan ("RRSP").

She was subsequently employed from XXXXXXXXXX at the XXXXXXXXXX, however, it is unclear from the documents submitted as to who her actual employer was for this period. It is also unclear as to whether any severance payment was received by the taxpayer in respect of her termination of employment as at XXXXXXXXXX

Based on the documentation provided, the taxpayer accepted an offer of employment from the XXXXXXXXXX which commenced XXXXXXXXXX and terminated XXXXXXXXXX. It is noted that the taxpayer was granted an educational leave from employment during the XXXXXXXXXX school year. The T4A issued to the taxpayer in XXXXXXXXXX in respect of the retiring allowance paid to her noted that the amount eligible for a rollover to RRSP or registered pension plan ("RPP") was $XXXXXXXXXX, based on XXXXXXXXXX years of service. The T4A was issued by XXXXXXXXXX (the "last employer"), which is also indicated to be the taxpayer's employer in the Minutes of Settlement included in your submission. We assume that XXXXXXXXXX was a predecessor to XXXXXXXXXX, however, you will likely wish to verify this.

In accordance with subparagraph 60(j.1)(ii) of the Act, the deduction for a transfer of a retiring allowance to an RRSP or RPP is limited to $2,000 times the number of years before 1996 during which the retiree was employed by the employer or a person related to the employer and $1,500 times the number of years before 1989 during which the retiree was employed by the employer or a person related to the employer wherein the retiree did not have any vested rights to employer contributions to a pension plan or a deferred profit sharing plan for those years.

The number of years of employment need not be continuous. Furthermore, where an employee is employed during any part of a calendar year, that calendar year can be counted in determining the total number of years of service.

A person related to the employer includes not only those persons that are related in accordance with section 251 of the Act, but also includes persons related to the employer by virtue of subparagraphs 60(j.1)(iv) and (v) of the Act. It is unlikely that INAC and either of the subsequent employers noted above would be related pursuant to section 251 of the Act, however, this is a question of fact that you may determine.

In accordance with subparagraph 60(j.1)(iv) of the Act, a "person related to the employer" includes any person whose business was acquired or continued by the employer. It is our understanding that INAC provides funding to band councils or other First Nation education authorities to support instructional services for status Indians residing on reserves and that the Indian Act provides INAC with the powers to arrange for the education of Indian children. This includes provisions for instructional services in on-reserve schools. We would suggest that INAC would not be a person related to the last employer pursuant to this subparagraph, as INAC was not carrying on a business when it employed the taxpayer to teach at the XXXXXXXXXX.

The decision in the Supreme Court of Canada case of Backman v. The Queen (2001 DTC 5149) examined the issue of what constitutes carrying on a business. The decision analysis noted that Black's Law Dictionary (6th Edition) defines the term to "carry on trade or business" as "To hold one's self out to others as engaged in the selling of goods or services". Another definition was considered which required at least three elements to be present: 1) the occupation of time, attention and labour; 2) the incurring of liabilities to other persons; and 3) the purpose of a livelihood or profit.

We would suggest that INAC was not holding itself out as being engaged in the sale of goods or services when it was funding education at the XXXXXXXXXX. Nor was INAC engaged in the provision of education for the purpose of a livelihood or a profit.

You will have to determine whether the taxpayer's employer during the period from XXXXXXXXXX was carrying on a business that was acquired or continued by the last employer.

Pursuant to subparagraph 60(j.1)(v) of the Act, where the employer pension plan recognizes any part of the years of service with a former employer, the former employer will be considered to be a person related to the employer, and all of the years of service with the former employer may be included for purposes of the calculation in subparagraph 60(j.1)(ii) of the Act. Note that where an employee commutes his or her defined benefit pension entitlement with a former employer and transfers the commuted value to a money purchase RPP of their new employer, in our view, subparagraph 60(j.1)(v) is met.

It is noted that the taxpayer is a member of the XXXXXXXXXX Pension Plan, which has a reciprocal agreement with the Government of Canada. The terms of the reciprocal agreement may be broad enough to allow recognition by the XXXXXXXXXX Pension Plan of the years of service of the taxpayer with INAC. You will need to determine whether the INAC service is recognized under the plan in respect of the taxpayer. You will also need to determine whether the service by the taxpayer at the XXXXXXXXXX has been recognized under the pension plan (if you have not already established by virtue of section 251 or by subparagraph 60(j.1)(iv) of the Act that the taxpayer's employer during this period is a person related to the last employer).

We also note that, based on the copy of form TD2 that was submitted, it appears that the taxpayer transferred $XXXXXXXXXX of her retiring allowance to the RPP of her former employer. It should be noted that a transfer of a retiring allowance under paragraph 60(j.1) of the Act constitutes a contribution to the recipient plan. Reference may be made to the wording of clause 60(j.1)(iii)(A) of the Act, which requires that the amount to be deducted by the taxpayer must have been paid "as a contribution to or under a registered pension plan". The definition of "excluded contribution" in subsection 8300(1) of the Income Tax Regulations ("the Regulations") does not include an amount that is transferred to an RPP under paragraph 60(j.1) of the Act. Accordingly, the transferred amount would be a contribution for the purposes of determining, under subsection 8301(4) of the Regulations, an individual's pension credit under a money purchase provision of the RPP. We have not verified whether a pension credit was reported for the taxpayer in respect of this transfer, however, it should be noted that given the amount transferred, the pension adjustment limits in subsection 147.1(8) of the Act would have been exceeded with the result that the RPP would become a revocable plan under that subsection. You may wish to contact the Registered Plans Directorate to further discuss this pension credit issue. The telephone number for their general enquiries line is (613) 954-0419.

We trust that the above comments will be of assistance to you. Please do not hesitate to contact Phillip Kohnen at 957-2093 should you require further information.

Roberta Albert, C.A.

for Director
Financial Industries Division
Income Tax Rulings Directorate